On the money

I am always surprised at how constrained the sector seems to think it is when it comes to realising its true financial potential. Maybe this attitude is the result of “pleading poverty” to government for so long in the hunt for resources, or straitjacketed accounting standards that can only ever demonstrate “breakeven”.

Whatever the reason, the sector continues to produce accounts that point to a healthy underlying financial position but which question the capacity to do more without significant levels of additional financial support. Traditional RSLs have some capacity (albeit limited) to do more, the argument goes, whereas large-scale voluntary stock transfers at least in the short term are highly geared and significantly constrained.

And yet the stark fact revealed by the industry’s Global Accounts analysis is that the average debt per unit across the sector is some £11,700. Average rents are approximately £2900 a year or £56 a week. For such housing stock in reasonably good long-term condition we as lenders quantify the resulting cashflows as being able to support and service debt of between £25,000 to £30,000 for each unit.

The industry could perhaps be working at 40% to 60% of its current capacity. On the 2002/3 figures this would imply current additional borrowing capacity of £15bn to £20bn – or 170,000 homes at £100,000 apiece.

These are very crude numbers, but even if they are wrong by a factor of 50%, that’s a lot of new social housing foregone.

One new treasurer I talked to, recruited from industry into an LSVT in the South-east, was astonished at the perceived limitations on the capacity of the business. Between us we concluded that its current financial capacity was easily three times the business plan to which it was currently working and to which it was committed by its funding arrangements.

RBC’s own work in relation to the Sunderland Housing Group has seen SHG’s borrowing capacity increase 44% within two to three years of transfer allowing them to embark on an ambitious new-build programme, without grant.

Average rents are £2900 a year – cashflows like that could be supporting debt of £30,000 for each unit

Some local authority stock is transferring for a few hundred pounds per unit. While the transfer price may reflect commitments made by the receiving landlord, the commercial reality is that the borrowing capacity of that stock once transferred is very much higher than implied in the business plans.

The industry’s overall income and expenditure accounts may not show any relevant surplus – £292m after receipts of disposals of fixed assets of £309m. This points to the fundamental problem of accounting for the “not-for-profit” sector. RSLs do not pay dividends to shareholders, and certainly do not want to pay tax. There has been no commercial incentive therefore to disclose a true underlying operational surplus. In effect the surplus is spent before it is disclosed and one major factor here is the treatment of maintenance and repair expenditure – much of which could be classified as discretionary and/or could be capitalised.

Arguably, up to 50% of the £2bn maintenance expenditure could be classified in this way, resulting in a £1bn industry operational surplus. This could service an increase in debt capacity of some £14bn.

There needs to be an appropriate method of presenting the balance sheets of RSLs – in particular the valuation of assets – as it is not valid to capitalise expenditure that does not enhance underlying asset values. Again, SHG shows how this could work – it achieved a 35% increase in value just by giving more appropriate instructions for an existing use valuation of its property, based on a more sophisticated categorisation of repair and investment costs.

If the true financial strength of this major not-for-profit industry is to be properly revealed, what’s needed is a fundamental overhaul of how accounting data is presented.